Fundamentals of Finance

Write the meaning of financial markets.

How do you measure the liquidity position of a company?

What do you mean by financial statement?

Real risk-free rate is 4 percent. Average inflation premium for five year is 8 percent. If maturity risk premium on 5-year security is 2 percent, what is the yield on 5-year securities?

A preferred stock pays dividend of Rs 15 per share. Investor's required rate of return is 12 percent. What is the value of the preferred stock?

Prime commercial bank charges a monthly interest rate of 3 percent on its credit card loans. What is the effective interest rate on the loan?

How does cash conversion cycle affect the size of working capital?

Why should we calculate cost of debt on after tax basis?

What is the present value of Rs 10,500 due in year 5, discounted at 8 percent?

Why is preferred stock called hybrid security?

Describe the finance functions.

Explain the determinants of market interest rate.

"Common stocks are generally considered as riskier than bonds". Do you agree? Why?

Lumbini Company have inventory conversion period of 35 days, and accounts receivable period is 30 days. Account payable is paid in 25 days. The company spends Rs 6 million operating cycle investments each year. Assume a 360-day year:
a. Calculate company's operating cycle and cash conversion cycle.
b. Calculate amount of financing required to support the company's cash conversion cycle.
c. How management might be able to reduce the cash conversion cycle.

Ragmati Textile Company has just issued Rs 1,000 par, 10% coupon bond with maturity of 7 years. Interest is paid semiannually. If investor's required rate of return is 12 percent, calculate value of the bond at present.

The management of Jaya Publishing Company Limited decided to buy a printer by taking a loan of Rs 100,000 for 3 years from Sanima Bank Limited. The loan bears a compound annual interest of 10 percent and calls for equal annual installment payments at the end of each of the 3 years.
a. What is the amount of annual payment?
b. Prepare a loan amortization schedule.

Sagarmatha Company's current stock price is Rs 360 and its last dividend was Rs 24. In view of company's strong financial position and its consequent low risk, its required rate of return is only 12 percent. If dividends are expected to grow at a constant rate in future, and if required rate of return on stock is expected to remain 12 at percent, what is company's growth rate and expected stock price 3 years from now?

What do you mean by financial environment? Explain the major components of financial environment.

Find the future value of the following ordinary annuities.
a. FV of Rs 400 each 6 months for 5 years at a simple rate of 12 percent, compounded semiannually.
b. FV of Rs 200 each 3 months for 5 years at a simple rate of 12 percent, compounded quarterly.
c. The annuities described in parts (a) and (b) have the same amount of money paid into them during the 5-year period and both earn interest at the same simple rate, yet the annuity in part (b) earns more than the one in part (a) over the 5 years. Why does this occur?

An analyst evaluating securities has obtained the following information. The real rate of interest is 2% and is expected to remain constant for the next 3 years. Inflation is expected to be 3% next year, 3.5% the following year, and 4.5% the third year. The maturity risk premium is estimated to be 0.40 percent. The liquidity premium on relevant 3-year securities is 0.30% and the default risk premium on relevant 3-year securities is 0.60%.
a. Calculate average inflation rate for 3 years period.
b. What is the yield on a 1-year T-bill?
c. What is the yield on a 3-year corporate bond?

The following data were taken from the financial statements of the Dhaulagiri Company for the year 2022. The norms given below are composite industry average on various sources for industry composite data.
The Company is interested in measuring its cost of its specific type of capital as well as its overall capital cost. Current investigations indicate that the following costs would be associated with the sale of debt, preferred stock and common stock. The company has a 40 percent average tax rate.
Debt: It can sell a 10 year, Rs 1,000 par bond with a 9 percent coupon for Rs 970. An underwriting fee of 2 percent of the face value would be incurred in the process.
Preferred stock: 12 percent preferred stock having face value of Rs 100 can be sold for Rs 95. A fee of Rs 5 must be paid to the underwriters.
Common Stock: The company's common stock is currently selling for Rs 500 per share. The company expects to pay a dividend of Rs 50 per share at the end of the current years. Its dividend is expected to grow at a 6 percent per year forever. It is expected that in order to sell the new common stock, it must be underpriced Rs 60 and therefore will reach the market at Rs 440 per share. The company must also pay a Rs 20 per share underwriting fee. The present capital shown below is considered to be optimal.

As a consultant of the company, please give the answer of the following.
a. How much of the Rs 50 million must be financed by equity capital if the present capital structure is to be maintained?
b. How much of the equity funding must come from the sale of new stock?
c. Calculate the component cost of:
1. New Debt
2. New preferred stock
3. Retained earnings / internal equity
4. New equity
d. What would be the company's weighted average cost of capital (WACC) if only retained earnings were used to finance additional growth?
e. What is the weighted average cost of capital when Rs 50 million is raised?
f. Briefly explain the uses of WACC.

Read the following information carefully and answer the questions that follow:

The Annapurna Company has Rs 100 million in total assets at the end of 2023. The Company has been growing rapidly during last five years. It has some other good investment opportunities for which it needs additional long-term funds amounted to Rs 50,000,000. The company plans to raise required funds through bonds, preferred stock and common stock. Company has Rs 10,000,000 internal equity to finance new project.

The Company is interested in measuring its cost of its specific type of capital as well as its overall capital cost. Current investigations indicate that the following costs would be associated with the sale of debt, preferred stock and common stock. The company has a 40 percent average tax rate.

Debt: It can sell a 10 year, Rs 1,000 par bond with a 9 percent coupon for Rs 970. An underwriting fee of 2 percent of the face value would be incurred in the process.

Preferred stock: 12 percent preferred stock having face value of Rs 100 can be sold for Rs 95. A fee of Rs 5 must be paid to the underwriters.

Common Stock: The company's common stock is currently selling for Rs 500 per share. The company expects to pay a dividend of Rs 50 per share at the end of the coming years. Its dividend is expected to grow at a 6 percent per year forever. It is expected that in order to sell the new common stock, it must be underpriced Rs 60 and therefore will reach the market at Rs 440 per share. The company must also pay a Rs 20 per share underwriting fee. The present capital shown below is considered to be optimal.

As a consultant of the company, please give the answer of the following.

• a. How much of the Rs 50 million must be financed by equity capital if the present capital structure is to be maintained?

• b. How much of the equity funding must come from the sale of new stock?

• c. Calculate the component cost of:

  1. New Debt

  2. New preferred stock

  3. Retained earnings / internal equity

  4. New equity

• d. What would be the company's weighted average cost of capital (WACC) if only retained earnings were used to finance additional growth?

• e. What is the weighted average cost of capital when Rs 50 million is raised?

• f. Briefly explain the uses of WACC